Retirement Out of Reach

Even before the recent market melt­downs, David, a 47-year-old engineer who lives in Portland, Oregon, was worried about being able to retire in 20 years. With two young boys in school, a mortgage and only David working full time, he and his wife, Stephanie, were growing increasingly concerned about their lack of savings. So they met with a financial advisor.

It turned out that they were right to be worried.

"The advisor said that if we saved very aggressively, I might be able to retire in my early 70s," he says. "It wasn’t quite what I was hoping to hear."

And that was before David and Steph­anie, like millions of other Americans, saw their retirement accounts pummeled by the credit crisis and its effect on the stock market.

The couple, who asked that their last names not be used, are in a situation that is emblematic of a whole generation of midcareer workers. In the wake of almost daily stock market drops, they might just now be realizing that they are going to have to work much longer than their parents’ generation did.

Most of the baby boomers who retire in the next few years have had a defined-benefit plan at some point in their careers, and it will provide them with some

guaranteed income. But the next generation, a group of employees who are now 40 to 50 years old, will be the first to have 401(k) plans as their primary source of retirement savings.

This phenomenon was already in the works before the credit crisis hit, experts note. With defined-benefit plans and retiree health care all but fading away and Social Security at risk, many midcareer workers already were confronting the fact that they would not have enough money to retire in their 60s, experts say. And as the past weeks have dem­onstrated, it can take just a few days of a plummeting stock market to seriously damage a nest egg.

As a result, employers may soon find their ranks increasingly filled with employees bent on working well past the traditional retirement age of 65.

At the very least, that could cause bottlenecks in companies’ plans to move people up the corporate ladders. But it might also mean something else: Firms could find themselves with a population of aging slackers—older workers who are doing just the bare minimum to get a paycheck without getting fired, warns Teresa Ghilarducci, the Bernard L. and Irene Schwartz chair in economic policy analysis at the New School for Social Research in New York.

Even worse, disgruntled older workers could resort to litigation or work sabotage over their lack of retirement savings, experts say.

"At the very least, employers may be facing employee disaffection," Ghilarducci says. "Employee revenge often comes in the form of work slowdown. It’s not so hard to do just enough to get by without getting fired."

These scenarios mean that it is more important than ever for companies to have effective performance management systems, thorough financial education programs and processes in place to engage older workers and keep them productive, HR consultants say.

"... If we saved very aggressively, I might be able to retire in my early 70s. —David, 47, engineer, Portland, Oregon

Employers who don’t think about this issue run the risk of becoming less competitive, says Alicia Munnell, director of the Center for Retirement Research at Boston College.

"If companies think they are going to be stuck with less-productive workers who are being paid relatively high compensation, they have a financial incentive to help those people accumulate substantive retirement savings," she says.

The great experiment When 401(k) plans were introduced in 1974, many large employers used them as a supplement to their defined-benefit plans. But over the past 20 years, 401(k) plans have virtually replaced such plans. As of 2005, 63 percent of active workers had access only to a defined-contribution plan, the Employee Benefit Research Institute says.

"We have a great experiment going on right now," says Don Stone, president of Plan Sponsor Advisors, a Chicago-based 401(k) plan consultant. "And that experiment is about seeing whether people are willing and able to fund their own retirement."

Congress has tried to help employees take on this task through legislation. The Pension Protection Act encourages employers to automatically enroll employees in their 401(k) plans and automatically step up their contributions on an annual basis. As part of the law, the Department of Labor approved a number of investments, such as managed accounts and target-date funds, that are basically managed for the employees—so that even if employees do nothing, they should be on track to save for retirement.

But although the Pension Protection Act may help younger employees just starting their careers, consultants aren’t sure it will do much for midcareer workers who until now haven’t focused on saving for retirement.

"These employees didn’t have the same messaging that younger workers have been exposed to in terms of the need to save 10 percent of their pay starting at the beginning of their careers," says Alison Borland, defined-contribution practice leader at Hewitt Associates. "They are just now struggling with how to make up for that gap."

How big an issue this will be remains to be seen, because research on exactly how much this group has put aside for retirement is spotty at best.

A 2007 Fidelity Investments study shows that the average account balance for employees 40 to 49 is $31,000. But that doesn’t include individual retirement accounts, which are important because many workers roll over their 401(k) balances to these accounts when they leave their jobs.

Data that include the 401(k)-turned-IRA holdings are not as recent. Research from the Center for Retirement Research, which based its figures on the Federal Reserve’s 2004 Survey of Consumer Finances, shows that the median amount in such accounts was $35,000 for a head of household 40 to 49 years old.

Both studies, though, point to a huge gap between what is being saved and what will be needed in retirement. On average, a married couple looking to retire in 2030 would need to save $378,000 to purchase an annuity that would cover just out-of-pocket health care costs in retirement, according to the Center for Retirement Research.

"We are going to have a major crisis 30 years from now unless we have a very strong economy and robust stock market," says Ted Benna, COO of Malvern Benefits Corp., a 401(k) plan administrator. Benna is also known as the founder of the first 401(k) plan.

Not everyone is convinced that these gloomy predictions are accurate.

According to Aon Consulting, a 45-year-old woman making $50,000 per year (the median income in the U.S.) and just starting to save for retirement now would have to put away 14 percent of her salary annually until she is 65. Assuming a 7 percent rate of return on savings, she would be able to accumulate $361,000 by 65, according to Aon. "This person can do it even if there isn’t a company match," says Cecil Hem­ingway, retirement practice director at Aon. "Everyone is wringing their hands over this stuff, but if you look at the facts, it’s not as ridiculous as it seems."

Getting employees on track Aon’s estimates may be accurate, but many midcareer employees can’t afford to put away 14 percent of their salaries every year.

With inflation around 5 percent and gas prices remaining high—not to mention nursery school expenses, a mortgage and the need to save for college—David, the engineer from Portland, says he can afford to contribute just 6 percent of his salary to his 401(k). His employer matches 25 cents on every dollar up to 4 percent of base pay.

"I guess I will be working for a long time," he says.

One way employers are trying to help midcareer workers is by offering them financial education.

Last year, for example, IBM launched MoneySmart, which gives its 128,000 U.S. employees access to personal financial planning over the phone. Although the program is available to all employees, one of the main reasons IBM launched it was to help out that "middle group" of employees, or those in their 40s and 50s, since the company froze its defined-benefit plan this year, says Karen Salinaro, vice president of compensation and benefits.

"This middle group of employees has multiple concerns ranging from college savings to retirement to whether they need or want a second career," she says. "They need a customized approach where they can sit with a counselor and go through the issues." So far 50 percent of IBM’s workforce has registered for MoneySmart.

IBM has also enhanced its 401(k) plan to allow workers to receive greater employer contributions to their accounts as they get closer to retirement, Salinaro says.

After the company decided to freeze its defined-benefit plan and make the 401(k) its primary retirement savings vehicle, it wanted to ensure that those employees who were closer to retirement would be able to catch up, Salinaro says.

"These employees didn't have the same messaging that younger workers have been exposed to in the terms of the need to save 10 percent of their pay starting at the beginning of their careers. They are just now struggling with how to make up for that gap." —Alison Borland, defined-contribution practice leader, Hewitt Associates

With the new 401(k) plan design, the workers furthest from retirement receive a basic match up to 5 percent of their pay and an additional 1 percent employer contribution. Employees closer to retirement receive a 6 percent employer match and an additional 2 to 4 percent employer contribution based on how close to retirement they are.

"The idea behind the design was to make sure we were being as fair as we possibly could be to the employee groups," Salinaro says.

Silgan Containers, a Woodland Hills, California-based container manufacturer with 6,000 employees, is another company that has made efforts to ensure that its middle-age workers who joined the company after it froze its defined-benefit plan in 2007 will be able to retire when they are ready. This is of particular concern since the company’s average worker age is 49, says Tony Cost, vice president of HR.

Silgan is raising new-hire pay to make up for the fact that new employees won’t have access to the company’s defined-benefit plan, Cost says.

The company is considering adding products to its 401(k) plan to allow employees to receive a guaranteed rate of return. Specifically, Cost says he likes Prudential Financial’s IncomeFlex, an annuity product for 401(k) plans that allows employees to lock in a 5 percent rate of return when they turn 50.

"We like that product because it essentially mixes the defined-benefit plan with a defined-contribution plan, in that if someone wants to put all of their 401(k) money into it, when they retire they can have a guaranteed stream of income for life," he says.

Silgan also has a profit-sharing plan that has a contribution of 3 to 6 percent a year, depending on the company’s performance. "We really believe that with all of these things, people are not going to be working into their 70s and 80s at Silgan," Cost says.

Planning ahead Even with the best 401(k) plan design and financial education programs, many employers may still find they have midcareer employees who won’t be ready to retire in the next 20 to 30 years, experts say.

For some industries, like manufacturing, having a lot of workers who won’t retire could be devastating, says Anna Rappaport, a Chicago-based consultant. These companies need physically able employees doing their work. Without them, productivity would drop.

But for employers with a large "knowledge" workforce, having a lot of older workers putting off retirement could be a blessing, Rappaport says. "If these are highly skilled, productive people, then companies are going to want them," she says.

The trick, then, becomes making sure these older workers remain productive. A number of employers are implementing programs to do so.

IBM, for example, is trying to keep older workers by encouraging them to pursue outside interests, says Kari Barbar, vice president of workforce programs.

In July, IBM unveiled Personal Learning Accounts, an employer-matching program in which IBM helps to fund employees’ outside education or training.

IBM matches 50 percent of employees’ contributions toward their learning, which the company hopes will keep workers engaged by allowing them to pursue other fields or advance their current careers.

"They could be learning a new language or they could be working on a cattle ranch," Barbar says. Employees with at least five years of service are eligible for the program. So far 500 employees have signed up.

"The majority of those that have signed up are older workers," says Laurie Freidman, a company spokeswoman. IBM would not disclose the average age of its workers, nor would it say how many are 40 to 50.

IBM also has programs aimed at ensuring it won’t have an excess of unproductive workers, regardless of age. All of IBM’s employees go through an extensive annual review that includes manager feedback and, when relevant, client feedback.

Employees are assessed not only in how they met their individual goals, but also in how they performed as a leader and mentor to others. "Those are the differentiators we look for beyond metrics," Barbar says.

Developing people and gauging employees’ performance is an ongoing process at IBM, notes Barbar, who says she has weekly one-on-one calls with each member of her team about their development.

The risk of not having effective performance management systems in place is that companies will end up with lots of older workers hanging on, doing just enough work to get by without being fired, says Ghilarducci from the New School for Social Research.

"It’s like that Dilbert cartoon where one guy asks another if he is retiring soon," she says. "The guy responds, ‘Retiring is for suckers, I just don’t do work and I get free coffee.’ "

Most forward-thinking companies, however, are putting processes in place to make sure that they are consistently assessing talent and understanding who is a contributor and who is not, says Paul Sanchez, a partner at Mercer.

One way companies are doing this is by setting up assessment centers, where employees are invited to come in and work on real-life problems the company is facing, San­chez says. "Observers can determine if this person is a real team player and thinks creatively or are they just average," he says.

Another way to make sure the older workers remain productive and engaged is to increase performance-based compensation, Sanchez says.

The companies that have invested a lot in performance management don’t anticipate a day when they will have a workforce filled with disengaged older workers.

"My crystal ball says that 10 to 15 years from now, there is still going to be a shortage of workers, so if that an older worker doesn’t want to be here anymore, I think he will be able to find something else to do," says Ed Evans, executive vice president and chief personnel officer at Phoenix-based Allied Waste Industries.

For now, most of the older workers who Evans sees in his workforce are continuing to work because they want to, not because they have to. "But this could be something down the road that might concern me," he says. "I’m going to get my executive leadership to look at it."

Most companies aren’t worried about a workforce of aging Gen X slackers yet, experts say. Most are still focused on the talent shortage that they anticipate as the baby boomers leave the workforce.

If companies really want to get ahead of the issue, they should connect their benefits experts with their workforce planning staff, says Jamie Hale, a senior workforce planning consultant at Watson Wyatt Worldwide.

"These groups do not talk to each other," she says. "So while the benefits people might be worried that this group of employees might not have enough savings to retire on in 15 years, that thought isn’t getting communicated to the workforce planning people."

"Fifteen years from now, when people start realizing they don’t have enough in their 401(k) accounts to retire, they are going to get mad," consultant Rappaport says. "And it’s the employers they are going to go after."